Saturday, April 23, 2011

A New Estimate of Drug Development Cost

"After years of debate over the cost of developing a drug, GlaxoSmithkline ceo has uttered a sentence that might resolve the issue once and for all – or reignite the argument," reports Pharmalot (here). "Speaking at a healthcare conference in London ... Andrew Witty explained that the $1 billion cost to develop a drug, which is often cited as the reason why some medicines have high price tags, is actually 'one of the great myths of the industry.'”

I have tackled the estimated $800 million drug develop cost gorilla before and garnered a lot of comments from readers, including Dr. Joseph DiMasi, whose team came up with that number way back in 2003. Since then, the number has been adjusted upward to over $1 Billion due to inflation/increased costs.

In his comments to me -- see "Tufts Hangs Tough on Opportunity Cost Analysis" -- DiMasi said "You write that [my] study is disputed. That's true, but, as far as I can see, the ultimate sources of that criticism are those with obvious political agendas and who lack appropriate expertise. I have never seen a criticism of the methodology from a bonafide economist."

Now comes a NEW estimate from someone who HAS the appropriate expertise, if by "appropriate" DiMasi meant someone who has has a PhD in economics. That person is Rebecca Warburton. She is the co-author of a recent paper published in Biosciences entitled "Demythologizing the high costs of pharmaceutical research" (BioSocieties 6, 34-50; March 2011). The lead author is Donald Light, an economic and organizational sociologist. He is also a visiting professor at Stanford University and a professor of comparative health-care at the University of Medicine and Dentistry of New Jersey.

Light and Warburton's NEW estimate for the MEDIAN cost to develop a new drug is $59.4 million, which is more than an order of magnitude LESS than the DiMasi estimate. To emphasize this difference, I created the following chart (I love charts!):

I labelled the new estimate "LSEPS" in honor of the London School of Economics and Political Science, which published the paper. SO we have two estimates from two schools -- DiMasi's estimate is most often referred to as the Tufts estimate.

How is it that the Tufts estimate is at least 14 TIMES the LSEPS estimate? Well, you'll have to read the LSEPS paper to find out or wait until I can get the authors to be a guest on my Pharma Marketing Talk show.

But Light and Warburton claim that the Tufts estimate is based on a biased sample of drugs and drug firm data, that R and D costs were ‘padded’ with legal and other nonresearch costs, included poorly documented preclinical costs, overestimated trial costs and sizes, and exaggerated risks of failure.

But Light and Warburton do make several interesting criticisms of the Tufts analysis, including debunking the infamous $400 million "Cost of Capital" estimate, which is a long-standing point of contention between DiMasi and his critics.

Simply stated, the cost of capital is the loss of returns from funds that would have been invested in the stock market, were the R and D project not undertaken. DiMasi used an estimated ‘cost of capital’ of 11 per cent, based on equity returns between 1985 and 2000. "Even if one were to accept the argument that profits foregone should be included as a ‘cost’, US government guidelines call for using 3 per cent, not the 11 per cent used by DiMasi and colleagues," said Light and Warbuton. NOTE: the $59.4 million LSEPS estimate includes a modest cost of capital allowance (about $16 million); without that, the NEW estimate is $43.4 million, about 1/18 what Tufts estimates.

I can't get cover all the criticisms Light and Warburton have of the $802 million Tufts gorilla. I suggest you read Derek's blog post (op cit) as well as this Science-based Medicine blog post: "What does a new drug cost?"

ADDENDUM: Tufts/DeMasi Responds
I was informed that Tufts/DiMasi responded to the Light and Warburton publication. Find that response here. An excerpt:

"In their commentary, Light and Warburton restate arguments about the methods and data used for our R&D cost study that they have had published elsewhere. We have thoroughly rebutted each and every one of their prior claims in two published responses that Light and Warburton do not cite in their current paper (DiMasi et al., 2005a, 2005b). In the current piece, Light and Warburton also attempt to operationalize their criticisms by making adjustments to our published estimates that purport to demonstrate that R&D costs are much lower than we estimated. They make five such adjustments, all of which are erroneous --- they inappropriately mix median values reported for individual drugs with what are mean values for the costs of clinical failures and preclinical fixed costs, and for which the concept of a median has no meaning; they misconstrue the nature of the corporate income tax and incorrectly consider manufacturing tax credits; they use discount rates that are meant for other contexts but that are inappropriate here; they treat line extension approvals as separate and independent units of observation alongside their original approvals; and they grossly misstate the meaning of and misuse figures in our paper on industry-reported data on expenditures on self-originated drugs, licensed-in drugs, and already-approved drugs. Detailed discussions of these issues can be found in our above-mentioned rebuttals. In short, every one of Light and Warbuton's adjustments are invalid. Furthermore, two peer-reviewed papers by current and former FTC economists, also not cited by Light and Warburton, validate our work using other methods and public data (Adams and Brantner, 2006, 2010). They find that R&D costs are likely as high or higher than our estimates."

- Joseph DiMasi, Ph.D.

The ending paragraph of the response reads more like the defense of a besieged fort than of an academic study:

"Make no mistake: While we are more than willing to engage in a productive discussion about research methodology and interpretation, Tufts CSDD will vigorously defend the scholarship, integrity, and validity of all its published research studies [their emphasis]. As noted above, we have addressed Light and Warburton’s criticisms of our cost study in the past. Going forward, we will continue to defend the study against these authors and others who attempt to denigrate the validity of its findings."

3 comments:

I'm not an economist, rather a keen observer of the industry. I conclude that if it only cost $59.4 million, there would be many more new drugs on the market. However, the last 10 years has seen very few new drugs. If we were to divide the industry's large R&D budget by $59.4 million, I would expect that the last ten years would have produced many significant new products. While neither number may be right, the estimate of $59.4MM seems suspiciously low.

Good point! I think, however, that the industry tends to use the same accounting tricks to inflate how much it spends on R&D. Whatever the number, about 90% of it is wasted on potential new drugs that never make it to market. So you just can't take the R&D number -- whatever it is -- and divide it my $59.4 million to estimate how many new drugs should be brought to market.

"wasted on potential new drugs that never make it to market." Those should be included, as in real time a company doesn't know if a chemical entered into preclinical development will make it to market.

How much does it cost to save a life by installing seat belts? Should we consider only the cost of seat belts when there is an accident that could have cost a life, or the cost of installing all seat belts? I'm for seat belts, but the cost-benefit ratio must account for all, as they must for drug failures as well as successes.

About the Author

Pharmaguy™ (@pharmaguy) is a "constructive critic" of the pharmaceutical industry. He is not shy about giving his opinion, which is respected by many insiders who share some of his views but who are unable to voice them on their own.